A Merrill Lynch client is appealing a federal court judge’s ruling that tossed her proposed class action lawsuit alleging the wirehouse “failed to properly maintain records” for her and some of its other clients, which allowed their stock holdings to be designated as “lost” or “unknown” and therefore reverted to state property — what’s known in the legal world as “escheated.”
In December, U.S. District Judge James Donato of the Northern District of California granted Merrill Lynch’s motion to dismiss the client’s lawsuit because she had already lost when she made related claims against Merrill Lynch at a Finra arbitration.
In response, on Jan. 4, the client, Dr. Winnie Fang, filed her appeal. Her lawyer, William Palmer of Sacramento’s Palmer Law Group, wants to continue to pursue Merrill Lynch about this issue. California’s approach to seizing purportedly unclaimed property and the wirehouse’s faulty recordkeeping lead to multiple clients losing ownership of their stock shares unnecessarily, Palmer argues.
In her lawsuit, Dr. Fang alleges she inherited from her deceased husband what became, after an IPO, 5,000 shares of common stock in Peet’s Coffee & Tea, Inc. She gave certificates for the shares to her Merrill Lynch stockbroker. Her husband’s initial stock purchase cost $26,000 but the shares’ value had risen to several hundred thousands of dollars, Palmer says.
“Dr. Fang believed that the original stock certificates that she delivered to Merrill Lynch were being safely held and that Merrill Lynch, which had purportedly taken all necessary steps to protect the investment, the most basic of which was to change the contact and address information at Peet’s pertaining to the stock so that Merrill Lynch could receive routine material information on the investment and reports from Peet’s and relay them to and advise Dr. Fang on her investment,” her lawsuit states.
“This case touches on a larger issue,” argues Palmer. Merrill Lynch’s policies allow for stockholders’ addresses to remain un-updated and that has led to hundreds of its clients losing their shares to states hungry to generate revenues from purportedly unclaimed property, Palmer says. A search Palmer conducted last year of the California State Controller’s office's electronic records of unclaimed property shows that out of more than 837 records that list Merrill Lynch as the owner, 19 had unknown addresses.
Three years ago, in another case, Palmer asked the U.S. Supreme Court to hear a challenge of California’s approach to unclaimed property. Though the nine justices refused to grant him a hearing, two of them — Justices Samuel Alito and Clarence Thomas —gave Palmer some hope that he may someday get the issue before the high court. Alito and Thomas noted in their written denial of the hearing that the “the constitutionality of current state escheat laws is a question that may merit review in a future case.”
With Dr. Fang’s filing with the U.S. Court of Appeals for the Ninth Circuit, Palmer hopes he can reverse the dismissal ruling and have the case sent back to the trial court. If that happens, he plans to file an amended class-action complaint about Merrill Lynch’s practice on behalf of Dr. Fang or, possibly, another Merrill Lynch client chosen to represent a class.
For its part, Merrill Lynch has persuaded the trial court and a Finra arbitration panel to decide in the wirehouse’s favor.
Since Dr. Fang did not authorize Merrill “to communicate her personal information to Peet’” or give it “a power-of-attorney to change her address of record” the firm would have risked liability under federal laws, specifically, the Gramm-Leach-Bliley Act, 15 U.S.C. § 6801, which requires financial institutions to safeguard its clients’ private information, according to a brief filed by the wirehouse’s lawyers from Munger Tolles & Olson.
Merrill Lynch’s brief argues Dr. Fang failed to maintain contact with Peet’s “years before depositing her paper share certificates” with Merrill Lynch. Her lawsuit presents no statutory or contractual obligation that required Merrill Lynch to contact Peet’s on Dr. Fang’s behalf, the brief adds.
Dr. Fang filed her related claims against Merrill Lynch with Finra in 2015. On February 8, 2018, a Finra panel issued an award, resolving the claims in favor of Merrill Lynch and ordering Dr. Fang to pay the firm $6,000 for expert witness fees. The Finra panel based its decision on Finra rules that bar class action claims before its arbitration panels and bar claimants from pursuing the allegations before a panel at the same time as they litigate those in federal court.
After the Finra panel issued the award, Merrill Lynch’s lawyers filed their motion asking the federal court to toss Dr. Fang’s lawsuit. In a brief supporting that motion, the Merrill Lynch lawyers allege that “after apparently souring on her chances of prevailing” at Finra, Dr. Fang “began a bizarre campaign to prevent it from proceeding to a decision — including refusing to submit a witness list, filing multiple motions to dismiss, refusing to appear for the merits hearing, filing this duplicative lawsuit and arguing that it divested Finra of jurisdiction, and even misrepresenting to the arbitration panel in writing that [the federal trial] court had enjoined the arbitration.”
In the same brief, Merrill Lynch lawyers argue the courts should deny Dr. Fang’s claims because of the Finra ruling, the claims’ time-barred status, and the claims’ failures based on merits.
When Judge Donato granted Merrill Lynch’s motion to dismiss Dr. Fang’s lawsuit in his Dec. 10, 2018 ruling, he based his decision on Dr. Fang’s failure to show that the Finra arbitration order should be vacated.
Her allegations are “an improper effort to relitigate in court the claims Fang arbitrated unsuccessfully,” Donato writes in his ruling.
A Merrill Lynch spokesperson declined to comment for this story. A Munger Tolles & Olson lawyer representing Merrill Lynch did not respond to a request for comment.